An Application of the Ornstein-Uhlenbeck Process to Pairs Trading
Trading and Market Microstructure
2024-12-18 v1
Abstract
We conduct a preliminary analysis of a pairs trading strategy using the Ornstein-Uhlenbeck (OU) process to model stock price spreads. We compare this approach to a naive pairs trading strategy that uses a rolling window to calculate mean and standard deviation parameters. Our findings suggest that the OU model captures signals and trends effectively but underperforms the naive model on a risk-return basis, likely due to non-stationary pairs and parameter tuning limitations.
Keywords
Cite
@article{arxiv.2412.12458,
title = {An Application of the Ornstein-Uhlenbeck Process to Pairs Trading},
author = {Jirat Suchato and Sean Wiryadi and Danran Chen and Ava Zhao and Michael Yue},
journal= {arXiv preprint arXiv:2412.12458},
year = {2024}
}